Newcrest Shakeup May Put Polish on Capital Raising

A shakeup of the top brass at Newcrest Mining Ltd. may not be the only change on the cards at Australia’s largest listed gold producer.

According to Sydney-based UBS analyst Jo Battershill, installing a new leadership team opens the door for Newcrest to raise more than 1 billion Australian dollars (US$945 million) in new equity. It comes as the struggling gold miner looks to get back on track after a gold-price slump and widespread writedowns prompted its biggest ever annual loss.

Reuters

Newcrest this week unveiled plans for Chairman Don Mercer to retire within months and Chief Executive Greg Robinson to stand down next year. Mr. Mercer will be replaced by Newcrest director Peter Hay when he retires in December, while it expects to name new chief operating officer Sandeep Biswas as Mr. Robinson’s successor in the latter half of 2014.

On Wednesday, incoming chairman Mr. Hay said all options were on the table to shore up the company’s balance sheet.

For Mr. Battershill, the signal was clear. “We believe this opens the door to a potential capital raising or refinancing,” he said.

UBS, which has a Sell rating on the stock, thinks Newcrest may need to raise as much as A$1.2 billion if it wants to get its gearing—or debt-to-equity level—down to a more investor-friendly 20%.

At the end of June, the close of its fiscal year, Newcrest’s net debt totaled A$4.14 billion, implying gearing of 29%.

“During recent presentations, the current chief executive [Mr. Robinson] has maintained a stance that the company is focused on retaining a conservative balance sheet,” notes Mr. Battershill. “However, with the volatility of commodity prices increasing, we believe that resource companies should target a maximum gearing ratio of 30% and subsequently do not believe that the Newcrest balance sheet is particularly conservative.”

Raising cash would also ease funding pressures should gold prices fall further, and give the miner more firepower to spend on expanding mines should prices rise. Gold is down 22% this year as the U.S. recovery gathers steam and investors preempt a tapering of the Federal Reserve’s bond-buying program, which has sparked record demand for the so-called safe haven in recent years.

Raising A$1.2 billion would equate to 112 million new shares, assuming an issue price of A$11 each, says UBS. This would lift Newcrest’s total shares on issue to around 877 million, Mr. Battershill says.

Newcrest has previously said options like stripping further costs out of its operations, which span Australia, Papua New Guinea, Indonesia and the Ivory Coast, would be considered before it raised any new equity.

“Equity is a tool in a toolkit, but is not something we are looking at this time,” Newcrest Chief Financial Officer Gerard Bond told reporters on a conference call in August.

Still, Newcrest’s new management has an uphill battle to win over investors. The company’s share price has fallen by two-thirds since mid-2011, and it’s being investigated by Australian regulators over its disclosure practices.

“Many shareholders [are] disenfranchised,” Mr. Battershill says. “We believe the new management have some difficult decisions to make including the potential closure or divestment of the underperforming mines and a return to balance sheet conservatism that reduces gearing to below 20%.”